In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA), 26 USCS 1445. The law provides that if a seller of real property is a “foreign person”, the buyer must withhold a tax equal to 10 % of gross purchase price, unless waived by law.
A “foreign person” is a nonresident foreign individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate. A resident alien is not considered a foreign person by law.
There are a number of exemptions to FIRPTA. A transaction is exempt if:
- the seller of real estate provides a non-foreign affidavit stating under penalty of perjury that the seller is not a foreign person
- the transaction involves the transfer of a property acquired to serve as the buyer’s residence and the amount realized does not exceed $300,000
- the seller obtains a “qualifying statement” from the Internal Revenue Service stating that no withholding will be required
Obtain legal advice
As part of any real estate sale involving a foreign investor, the buyer and seller should consider entering into a specific agreement regarding FIRPTA compliance. The expertise of a real estate attorney can be helpful in avoiding complications that might otherwise arise at the last minute and delay closing. As always, when dealing with the Internal Revenue Service, it is important to proceed with great caution, as “an ounce of prevention is better than cure.”